TAX NEWS - DECEMber 2009

New Jersey Income / Franchise tax: Intangible holding company earning patent royalties has nexus under Lanco even prior to 1996 rule change

Praxair Technology, Inc. v. Division, N.J. (12/15/09). The New Jersey Supreme Court reversed the New Jersey Superior Court, Appellate Division's 2008 ruling, to hold that the economic nexus rule established in Lanco applies for tax years prior to 1996, the year in which an amended department regulation added an example providing that a royalty-earning intangible holding company has income tax nexus because of earning trademark royalties related to sales of products by an affiliate in New Jersey.

The Court rejected the taxpayer's argument that its business arrangement with an in-state affiliate became subject to New Jersey's corporation business tax only after the department adopted a 1996 regulatory example that mirrored the taxpayer's intangible holding company arrangement.

 The Court explained that such an argument is erroneously premised on an assumption that tax liability can "somehow flow from a regulatory change" or that taxing power can be expanded by the executive branch via the adoption of regulations. Accordingly, the Court reasoned that the 1996 added regulatory example was not a policy change, but merely clarified and explained the existing statute and regulation where the use of intangible property for income-producing purposes in New Jersey renders that property's owner subject to corporation business taxation either as one who is "doing business" or "employing or owning capital or property" in New Jersey.
URL: http://www.judiciary.state.nj.us/opinions/supreme/A-91-08.pdf

The Court additionally remanded the case to the New Jersey Superior Court, Appellate Division, for "plenary consideration" of the taxpayer's challenges to the imposition of the late filing penalty and the post-tax amnesty penalties.

Note that while Lanco established that an out-of-state intangible holding company lacking an in-state physical presence can have New Jersey corporate income tax nexus based on its in-state licensing activities, that case addressed a 1997-1998 tax year (i.e., after the 1996 regulatory revision but before a 2002 statutory amendment that broadened the "doing business" language.)